The battle between Chinese damas and fund managers

Most heavyweight Chinese stocks are trading sideways for lack of sufficient liquidity, while hot money has been chasing a large number of small and medium-cap stocks.

Therefore, investors should be calm in light of current market volatility.

Some listed companies have issued share placements, but their share prices have posted divergent performances because of the different types of investors in them.

Investors should dig into the underlying reasons before making any bet.

For example, the share sales at China Taiping Insurance Holdings Co. Ltd. (00966.HK), Fosun International Ltd. (00656.HK) and China Resources Land Ltd. (01109.HK) have led to a mediocre performance in their stock prices, even though some shares were sold to prominent investors like Alibaba Group Holding Ltd. founder Jack Ma Yun and Tencent Holdings Ltd. (00700.HK) boss Pony Ma Huateng.

In fact, these stocks had already posted substantial gains.

The future performance of these stocks mainly hinges on whether foreign investors will increase their allocation to Chinese shares after the expected inclusion of A shares in the MSCI Emerging Markets Index.

The Hong Kong market has become a battlefield between two groups of investors, foreign institutional investors and mainland retail investors (many of whom are the legendary damas, or middle-aged women, who speculate in the markets).

The influx of hot money has greatly boosted market activity.

And foreign investors are closely watching the progress of Beijing’s economic and market reforms.

The possible inclusion of A shares in the MSCI index, coupled with the possible inclusion of the renminbi in the basket of currencies underlying the International Monetary Fund’s Special Drawing Rights, may become the catalyst for a bull market that will lure global investors.

By contrast, another group of smaller-cap stocks has posted multifold jumps in their share prices after completing share placements, which indicates the involvement of big mainland investors.

They are joined by speculative individual investors, who are betting on stocks on Shenzhen’s Growth Enterprise Market with P/E ratios close to 100 times.

There are many examples of such smaller-cap stocks offering shares to big investors, driving up the share price for a win-win situation.

However, it could be quite tricky for big investors hoping to take profits at a high price.

It’s easy to find buyers amid the bullish market sentiment and abundant liquidity at the moment.

However, the bubble will burst, sooner or later.

Meanwhile, the market is widely expecting the launch of Shenzhen-Hong Kong Stock Connect in mid-2015, and quotas for cross-border transactions will be raised eventually.

The market could become very volatile, as different investors are wrestling against one another.

Local retail investors should allocate only 10 percent of their portfolio to the stock market this month.

The participation of foreign institutional investors and mainland individual investors would bring challenges as well as opportunities for the Hong Kong market.

The city has a sound legal and regulatory framework, which attracts foreign funds and a large number of mainland companies to list here.

However, cross-border transactions could pose a great challenge for regulators.

As the Hong Kong market gradually follows the trading pattern of its mainland counterparts, we may see some insider trading and illicit activity.

Also, foreign investors are always skeptical about the credibility of the accounting at Chinese companies.

If this issue can’t be fixed, foreign investors will make only short-term bets on the Hong Kong and China markets.

Therefore, Hong Kong should play an active role in beefing up regulations and look for long-term benefits for all parties.

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